“Run of the Mill” Market Returns

Jul 5, 2017

US equities have treated investors to healthy returns so far in 2017. And if you measure performance from either the Election or the lows in February 2016, things look even better. One of the issues with measuring market performance from an extreme high or low point is that very few people ever time the market perfectly to buy at the low. And even though it may seem like you always tend to buy things right at the exact top of the market, that is rarely the case either. In order to remove the appearance of cherry-picking returns, measuring performance based on the calendar removes these kind of biases.

Along those lines, the chart below shows the S&P 500’s current and average annualized total returns over the last one, two, five, ten, and twenty years. The last year has been fantastic for the bulls. With a gain of just under 18% on a total return basis, the S&P 500 has exceeded its average 12-month return by more than 800 basis points (bps). Those are extremely solid returns, but over other time frames, the returns aren’t nearly as good. For example, in the last two years, the S&P 500 has delivered an annualized gain of 10.7%, or only slightly more than the historical average of 10.4%. On a five-year time frame, returns are once again above average (14.6% vs 10.3%), but then when we go out over the last ten and twenty years, the 7.2% annualized return falls more than 300 bps short of the historical average.

To illustrate this another way, the chart below shows the current annualized returns of the S&P 500 and where they rank on a percentile basis versus all periods since the late 1920s. Even with a gain of 17.9% in the last year, the S&P 500’s one-year return ranks in just the 62nd percentile relative to all other one-year periods in its history. The best percentile rank of all the time periods is over the last five years where the 14.6% annualized gain ranks in the 67th percentile. Over the last two, ten, and twenty years, though, returns have been sub-par relative to history. The S&P 500’s two-year annualized gain of 10.7% ranks in just the 47th percentile, the ten-year 7.2% annualized gain ranks in just the 27th percentile, while the twenty-year return ranks in just the 8th percentile! In the S&P’s history, there haven’t been many twenty-year periods where performance has been worse than in the last twenty years.